Sunday, August 23, 2009

The Dog days of summer

The Dog Days of Summer

With school days just around the corner the market actions have seen a steady rising upward bias market off the March lows. Corrections have been short and shallow. There are a bunch of stocks that have rallied from $1-4 to $20-30 in a short period of time. Currently there are too many people that are bearish. The September-October period historically has been weak. That might occur this year again but the chance of a sharp decline of over 20% will be put off till next year. The recent weakness in our markets is due to China falling over 20% in a few weeks after rising over 90% in the past 6 months. Also China has tightened credit.

The free wheeling spending has just started to hit the streets. Examples like taking out future demand for cars by extending the cash for clunkers deal. GM even has to start ramping up production with overtime hours as they lack workers which they just bought out. Those overtime hours have to be more expensive then hiring a few more people. In the longer run this policy will leave the consumer waiting for the next deal. Next Spring car sales will be slow. Maybe the government might start tearing down houses next.

Our country is spending $1.85 for every dollar that comes in from taxpayers. Housing isn’t coming back anytime soon. Commercial real-estate is seeing lower rents and higher vacancy rates along with a tighter credit market. Residential housing has stabilized in the junk end but continues to decline in the prime end. Real interest rates are near zero. There are so many problems to fix with most being helped over time. Problem is many solutions our government is currently trying to use will only put off the pending world financial spiral that will begin next year and last for 2-4 more years. Once the washout runs its course a new stronger cycle will emerge.

The current bear market began in March 2000. The past 9 years the market has been in a cyclical bear market with sharp rallies along the way. The current rally is no different. There is resistance in the DOW 9650 then 9750 then 10,250. We probably will see the 10K area but not on this go around. If it doesn’t happen in the next 3 weeks then odds favor the downside. We are days away from a medium term top. The S&P could see 1070-1080 before a 10-15% correction that will last a month or 2 before a recovery that may not past the current highs. Next year will see a vast number of financial problems that will start the next and last major leg down to DOW sub-6,000 and maybe 4200.

Bring your stops up to within 5% of the current highs. Scale out of positions while those with experience buy put options or short stocks. The market is at a swing point that probably sees a sharp quick spike up before the drop. 8850 is key support followed by 8400 then 8150. A break below that is dangerous. On the S&P 975 then 950 support followed by 890 support. The big break in the market will occur next year. There are a number of factors that will lead this decline that are technical, fundamental and governmental.

Stay away from ETF’s that are either double long or short. Stay away from ETF’s that are in the commodity arena. Our government wants to regulate them so they can only hold a small amount of any commodity. The UNG (Natural gas fund) has so much cash and can’t buy enough futures contracts because the rules are being changed as to contract limits and who can buy them. The Fund has entered into a swap deal but the NAV will be hard to figure on a mark to mark basis. In the end the Fund will not mirror the price move of natural gas. Natural gas is the cheapest it’s been in 7 years. It might go a bit lower as traders need to unwind long UNG and short oil. Our government is pro-oil and negative natural gas with the latter being so much cleaner. Our country is abundant in natural gas but the oil lobbyists are too strong. All the trucks and buses should be run on natural gas. If our government changes our stance then natural gas is a screaming buy at current levels for long term appreciation.

The double short or long ETF’s do not work over the long run. They will run out of money and be worthless. Commissions and a volatile market will put these guys out of business in the next 6-12 months. It will be a big lawsuit next year. Since they use leverage they must cover their losses over time and then will run out of money. Since they try to mirror the market movement 2 or 3 fold they end up shorting the bottom and covering at the top. Stay away from these vehicles before they crash. It won’t matter if they are double long or short. The only ones that work are the SPY, DIA and GLD. If you think the market is going down just short the ETF don’t buy the inverse ETF(i.e. DOG, SDS)

As for recommendations at this time caution is the word for those long. I will start to begin shorting stocks this week looking for the ones that have gone up from $1 or 2 bucks to $15 or $20 since March. These are short term trades as I stated earlier the big bear will feast next year.

Always use trailing stops and scale in and out of the positions.


DTG $23-25 stop 28.75 target $15-17
ACH $31-33 stop $36 target $22-25
DOW $22-24 stop 26.75 target $15-17
IBM $125-128 stop $132 target $110-112
AXP $33-35 stop 38.50 target $25-27
GLD $93-95 stop 96.50 target 87-89
IP $ 21-23 stop 26 target 15-17
MAS $14-16 stop 18 target 10-12
FCX $66-68 stop 71.25 target 50-53
WFMI $29.75-30.75 stop 33.25 target 22-25
TIN $18-20 stop 22 target 13-15
HPQ $44.50-45.50 stop 48 target 38-40
STT $54.50-56 stop 59.75 target 45-47
ISRG $245-250 stop 285 target 180-190
WDC $33-35 stop 38 target 25-27
BAC $18-19 stop 22 target 10-12
KLAC $33.50-35 stop 38 target 24-26
COF $40-42 stop 46 target 25-27
AIG $38-40 stop 46 target 18-20
TEN $18.50-20 stop 23 target 10-12
WYNN $68-70 stop 76 target 45-47
LNC $29-31 stop 36 target 16-18
WFC $29.50-31 stop 34.75 target 20-22
MMM $73-75 stop 79.25 target 60-62
R $40-42 stop 45.50 target 29-31

Only like Natural gas futures long term out 6-9 months.